Are we already done with the Santa rally?
Portfolio: What's happening in the markets and with my portfolio
It’s almost the most wonderful time of the year…the Holidays. Christmas trees are alit in our homes and our malls. Loved ones start sending each other “In case you were wondering what I would like..” gift ideas (I just received one from my wife yesterday…lol). Shopaholics cannot wait for the Black Friday (BF) sale, the Cyber Monday sale, the pre-BF deals, the early-BF flash price drops…About this time, my Mom would start playing X’mas music in the house, in the car and all the time. God bless Moms!
Even investors look forward to the last month of the year because historically markets have been much kinder to their portfolios. Fund managers have completed their Oct 31st year-end tax loss harvesting (selling) and are now more inclined to buy stocks to window-dress their portfolios. Large institutional investors have steady inflows (from 401k and IRA participants) but less days to deploy those funds (more holidays), which results in more bullish behavior. Stocks that have been doing well all year tend to be bought and stocks that have been dogs tend to be sold.
All that said, this year has been different.
Firstly, it is not yet X’mas. We are still in mid-Nov for crying out loud!
More importantly, the outcome of the US elections are now clear. A new administration is coming in with an undeniable political sweep and a strong mandate to be pro-business, pro-market, less regulatory, more tax-friendly and generally good for stocks.
So this raises the very pertinent question…
Will we get a Santa rally this year too?
But, hold on a sec. Markets surged higher once the US election results were announced. Sectors like financials, energy, consumer discretionary, small caps and healthcare gained value. Any industry that is highly regulated, bogged down by high interest rates, competing against imports or heavily taxed suddenly felt a bit more liberated taking their stocks higher. Crypto and meme stocks are trading like it is 2021 all over again…remember those heady days?
So now I am inclined to tweak my original question…as the title of this post suggests. We really need to be asking…
Is the Santa rally already here and will it last until year end?
Welcome to the Beachman community, where we follow the most pertinent market signals that you need to track as an investor…AND…the context and the key takeaways for each of these developments.
NOTE: Beachman’s Newsletter has maintained subscription rates steady for the past 2 years. Unfortunately, our costs have increased and we have to raise our prices just a tad in Dec. The new pricing will be published in a few days. Rest assured, we strive to keep this publication affordable and ad-free so that we can focus on investing wisely and learning as a community. You can lock in the current, heavily-discounted, lifetime, annual subscription price now by clicking the button below.
Your annual rate will not change for the life of your subscription!
Table of contents
Beachman recommends
What is the Santa rally?
Q4 market performance
Market signals
Beachman’s investing plan
Conclusion
Upcoming exclusive paid content
Beachman recommends
Each week, I share a recommendation for an app, a book, a website, a podcast, a publication, a movie…anything that I find interesting and useful from an investing and financial management perspective. I don’t get paid to do this. Beachman’s Newsletter has and always will be an ad-free publication. So here goes…
Cem Karsan
One of the most astute investors that I follow is Cem Karsan. He used to be a market maker and now manages money for large clients. Cem has his finger on the pulse of the markets - what’s happening now and could happen in the future. You can follow Cem on CNBC, Schwab Network, YouTube, podcasts and Twitter. It takes a while to understand Cem’s language, memes and icons…all of which is very options-trader related. However, once you get his lingo you will not be disappointed.
Follow Beachman
On the daily, you can find Beachman in three places…
Beachman’s Substack chat line here
Beachman’s Substack feed here
Beachman’s Threads feed here
Please check out the must-reads listed on the About page and the Roadmap page. I have stopped using Twitter.
What is the Santa rally?
The Santa rally refers to an increase in the stock market that happens around the X’mas holiday, Dec 25th. These annual rallies tend to start during the week leading up to Dec 25th and continue through the first week of Jan.
Several theories attempt to explain the Santa Claus rally: Investor optimism driven by the holiday spirit, increased holiday shopping, people investing their holiday bonuses, institutional investors taking time off during this period, leaving the market to retail investors who tend to be more bullish.
Yale Hirsch, founder of the Stock Trader’s Almanac, coined the term "Santa Claus Rally" in 1972. He identified the timeframe of the rally as the last five trading days of the year and the first two trading days of the new year. Historically, these seven days have yielded positive results: From 1950 to 2022, the SP 500 experienced a Santa rally about 80% of the time with an average return of +1.4%. However, from 2002 to 2022 the Santa rally has not consistently shown up.
Q4 market performance
Going back all the way to 1928, the average Q4 return in the SP500 has been +3.1%.
Since Oct 1st this year, the SP500 has already risen about +2.25%, while the tech-heavy Nasdaq has tacked on about +3.25%. Markets were pretty flat leading into the Nov 5th US elections, but all that changed once the results were announced. Markets zoomed higher and barring a few dips here and there, they have not really looked back.
However, now there are early signs that much of the Santa rally has been pulled forward (from year-end) and it might get tougher to squeeze more juice from markets through early 2025. Not saying it is impossible, just a bit harder.
Market signals
Let’s take a closer look at some of these leading market signals…
LT bond rates: have risen and stayed elevated in spite of stocks going higher. Mortgage rates are higher too…not many homes being bought these days. Bonds are worried about the growing deficit…it is already high and will go higher with more tax cuts in 2025. With less tax inflows, more US Treasury bonds would have to be sold to fund the government, leading to lower bond values and even higher LT tax rates…leading to more interest payments to these bond holders and a higher deficit.
Inflation: If we get more import tariffs, inflation will rise and the US Fed might have to slow down their pace of rate cuts in 2025. Economists at GS, Barclays and JPM have all revised their Fed forecasts to show fewer interest rate cuts in 2025.
Markets are closely watching the 5% mark for 10-year US bonds….this is considered a red line in the sand…a potential breaking point.
Valuations: are becoming meaningless in some stocks and certainly in the crypto space. Do you know how many trillion $ market cap companies there are in the US? There are 8 such mega cap companies with 3-4 waiting in the wings to join the club. Bitcoin, a digital asset with no underlying business model or operations, has a market cap of $1.8T. Bitcoin is now more valuable than Meta or Tesla or Berkshire Hathaway. Even Dogecoin, a farcical crypto currency, has a $53B market cap, making it larger than 62% of the SP500 companies. We see such frothiness in stock prices too. Examining forward PE ratios, I found Upstart at 370, Fastly at 423, Gamestop at 316, Reddit at 285 and Palantir at 144.
A trillion here, a billion there…heh, as long as the market keeps going higher, who cares, right?
Running of the memes: is probably a good way to describe what is happening in the crypto space today. I mentioned Bitcoin and Doge above. I remember this sort of frenzy about two years ago when NFTs were trading like Renaissance art. People were bidding up pictures of apes and rocks. Today, we the likes of Floki, Peanut the Squirrel, Moo Deng and even my favorite, Fartcoin. It’s cool to YOLO into these hot coins and then sell to the next sucker that comes along. Everyone is trying to make a quick buck and the crypto exchanges are minting money in transaction fees.
The last market signal we will discuss today is…
The US$: which remains very elevated and currently above $106, using the DXY index as the measuring gauge. It has risen about +5% since Sept with half of that move coming since the US elections. What do you think happens to the sales and earnings of about 30% of SP500 companies in light of a strong dollar? Well, they go down because international buyers of find it more expensive to make US purchases - their local currency is weaker, the US$ is stronger and thus they buy less. Just read Netflix’s 2022 earnings reports or listen to their 2022 earnings calls - they could not stop whining about the strong US $ and how it was hurting their business.
And we know that more US tariffs are coming. So exporting countries will have to find ways to depreciate their currencies to encourage more US buying of their own exports. E.g. MuFG bank estimates that a 60% tariff on Chinese imports will require the Chinese currency to depreciate about 10-12% to maintain the balance of trade, keeping everything else unchanged.
You see the spiraling math problem here? Watch the critical $110 level for the DXY index.
Side note: Europe is looking particularly weak. The UK is having Brexit regrets. Germany’s manufacturing powerhouse sector is in contraction. While tourism is booming, everything else in the EU economy seems to be faltering, including their currencies.
Beachman’s investing plan
Given the market signals discussed above…
…given the key questions that I am researching…
…my simple, actionable, measurable investing plan is as follows…